A New Lease on Life for Homestore?

  |  January 10, 2003   |  Comments

Still recovering from an accounting scandal, the online real estate play settles an old dispute and signs a new marketing agreement with AOL. AOL Names Branding Exec AOL Said to Take $10 Billion Charge

Scandal-plagued online real estate play Homestore is taking what it hopes will be a major step along the road to recovery, settling a dispute with America Online and signing a new marketing pact with AOL.

Under the new 18-month agreement, Westlake Village, Calif.-based Homestore gets the exclusive right to provide AOL with its real estate listings and other content. AOL will boost its marketing efforts and more prominently integrate Homestore's content in a redesigned real estate area on the proprietary service.

Homestore will make quarterly cash payments of $3.75 million to AOL Time Warner's online unit, totaling $22.5 million. The news sent Homestore stock soaring in after-hours trading on Thursday and also was seen as a good move for AOL.

The new marketing agreement comes as AOL reportedly is preparing to take another major charge against earnings, up to $10 billion, related to the ongoing deterioration in the value of its America Online unit.

The new agreement also calls for the companies to continue to share advertising revenue in certain home-related categories. Government prosecutors are said to be continuing to investigate as many as 16 so-called round-trip advertising transactions involving America Online and Homestore, according to a Wall Street Journal report.

Homestore's connections with AOL have been problematic for some time. Homestore, which has seen a number of former executives convicted in a scheme that involved overstating ad revenues, named a new management team a year ago.

Homestore and AOL signed their original marketing pact in May of 2000.

The dispute over the old contract related to Homestore's October 2001 demand for arbitration with AOL, alleging that AOL had breached a distribution deal with Homestore.

Homestore CEO Mike Long said the settlement of the old agreement "allows us to eliminate the looming risk" of payments due to America Online under the existing contract.

The settlement calls for a $7.5 million cash payment from Homestore to AOL and allows AOL to draw down on an existing $90 million letter of credit secured by restricted cash on Homestore's balance sheet.

And, by ending the previous deal, Homestore avoids having to hand over to AOL an additional "make-whole" payment in July. Based on Homestore's current share price, that would have been about $57 million in cash or stock.

On Wednesday of this week, a fourth former Homestore executive pleaded guilty to criminal charges resulting from the scandal. Jeffrey Kalina, Homestore's former senior manager of mergers and acquisitions, pleaded guilty to one criminal count of securities fraud in a scheme that saw the company overstate its 2001 ad revenues revenues by $46.4 million.

He also settled a civil insider trading charge brought by the Securities and Exchange Commission.

Other former Homestore execs who have pleaded guilty are Joseph Shew, the company's former chief financial officer; the company's former Chief Operating Officer John Giesecke; and John DeSimone, its former vice president of transactions.

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